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The 2001-2002 Argentine Economic Crisis

Uploaded by CaseyP on Jun 11, 2017

The 2001 Argentine Economic CrisisArgentina was once one of the largest economies in Latin America during the early 1990s till the early 2000 when she experienced an immense economic crisis. The nation witnessed rapid growth, but rising national debt coupled with inflation resulted in stagnation of economic growth. To minimize inflation, the central bank placed a peg on the Argentinean Peso against the dollar (a Peso to a dollar). The country's strict currency peg to the American dollar, pro‐cyclical monetary policies, and excessive global borrowing made Argentina unable to tackle different fiscal shocks (Morales & Clavijo, 2015). Due to concerns about deposit freeze and the peso’s depreciation, interest rates rose abruptly, which ultimately resulted in the 2001 currency and banking crisis.Many factors were responsible for the mentioned crisis. These include government debt, austerity measures, fixed exchange rate, and the devaluation of the local currency. Amid 1999 and 2002, the Argentinean national debt was out of control. This was influenced by inheritance of debt from the 1980s, corruption and poor tax management, reduction in duty incomes from depression, and rise in federal spending (Dellepiane Avellaneda, 2014). Owing to this, global investors lost trust in Argentinean securities and loan fees increased by more than 30%. This forced Argentina to rely on loans from the International Monetary Fund to meet its shortfalls. While reacting to the emergency, the Argentinean government adopted various austerity measures, for example, cutting wages and spending to attempt and achieve IMF deficit reduction objectives. The actions prompted a greater fall in GDP, failed to resolve the crisis, and lowered economic growth, which led to the emergency.Additionally, Argentina avoided the fixed exchange rate and quit attempting to keep the peso pegged to the dollar. The legislature likewise tried to minimize capital outflows by freezing various bank accounts for a year. Leaving the peg prompted an immense downgrading in the peso cash making the inflation at 80%. Notably, leaving the fixed exchange rate coupled with devaluation resulted in low consumer spending in the country (Morales & Clavijo, 2015). The crisis in Argentina made its exports competitive but imports from South American nations such as Brazil uncompetitive. This prompted a significant increment in export demand while the devaluation forced Argentineans to purchase few imports from neighboring countries and more local products.Besides, Argentina was negatively influenced when the dollar increased against the Brazilian Real in 1999. This implied that the Argentinean currency encountered...